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Are Australian stocks set to ride another bull market?

January 27th, 2012 · Greg Atkinson · 23 Comments

Recently the markets appear to have settled somewhat and the Australian stock market has steadily been heading higher so far in 2012. Could we be seeing the early signs of another bull market taking hold or are we about to see another sharp correction take the ASX All Ordinaries back down towards 4000 and perhaps lower?

Over the last three months Australian stocks have been on quite a ride. In November and December 2011 we saw stocks rally strongly towards 4400 only to fall back quickly towards 4000. This movement can been seen on the candlestick chart below.

ASX All Ordinaries 3 Month Candlestick Chart

all_ords_3_month_candlestick_chart_jan_2012

At present the All Ords appears to be trending upwards however the Chinese New Year holiday period has probably quietened things down a little so we are perhaps in a period of calm before the storm.

Then again maybe the U.S. economy is really on the mend and Australian stocks are on the verge of a long term upwards trend? A few more interest rate cuts by the RBA may weaken the Australian dollar enough to attract foreign money back into our stock market and entice people to move money out of cash (and gold) into stocks.

The U.S. S&P 500 Index has started the year strongly and outperformed the All Ords by quite a margin as Australian stocks don’t seem to be getting the lift from the U.S. stock market as they once did. This is probably due to continuing debt crisis in Europe and its possible impact on the Chinese economy.

ASX All Ordinaries versus S&P 500 Index 1 Year Chart

all_ords_vs_sp500_1_year_chart_jan_2012

Recently (and as I predicted) the IMF (International Monetary Fund) has been cutting its growth forecasts for the global economy and on 24th January issued a statement in which it said it expected advanced economies to grow by just 1.2% during 2012-2013.

In Asia the IMF expects growth to be more robust at 5.75% and in China growth in 2012 is expected to be 8.2% which I expect will be downgraded later this year closer to 7.0%.

Source: IMF Marks Down Global Growth Forecast, Sees Risk on Rise

The IMF forecasts highlight that 2012 is likely to be a year where global economic growth slows and so this will keep commodity prices subdued. Therefore I don’t expect a wide rally across stocks in the mining sector this year.

Another worrying sign is that the Baltic Dry Index has continued to fall is is now not far above the low it reached during the height of the Global Financial Crisis (GFC) in late 2008. Shipping companies are hurting and not even slow steaming or a large number of laid-up ships appear to be pushing up shipping rates at the moment.

So although the U.S. economy might be showing some signs of recovery this is unlikely to give our stock market much of a boost as slowing demand from Asia and faltering economies across Europe will in effect, drag Australian shares in the other direction.

At this stage my crystal ball gazing leads me to believe that there will be another major move downwards before the market will set itself up for a serious run past 4400 and up towards 5000.

Now for a few more charts worth having a look at. Firstly let’s have a look at BHP Billiton versus the AMEX Oil & Gas Index.

BHP Billiton (BHP) and AMEX Oil & Gas Index (XOI) 10 Year Chart

bhp_vs_amex_oilgas_10_year_chart_jan_2012

What I find interesting about this chart is how the relationship between the BHP share price and the AMEX Oil & Gas Index broke down during the GFC in 2008 but now appears to be slowly coming back into some sort of alignment. Rightly or wrongly I see this as a indication that the markets might be able to sort themselves out this year.

If the BHP share price and AMEX Oil & Gas Index fell back to 2005-2006 levels then I would see this as a very positive indicator.

Another useful chart to look at is the long term chart of the ASX All Ordinaries Index.

ASX All Ordinaries Index: 1988 t0 2012

all_ords_1988_2012_chart_jan_2012

On the chart above I have drawn a couple of approximate long term trend lines which suggest to me that the Australian stock market is trading in a range which is basically aligned to the trend over the last 20 years. The sharp rally up from 4000 to nearly 7000 between 2003-2007 was too good to be true and the stock market is now basically back down to where it should be.

My personal view is that the top trend line is closer to where the market should be so that is why I have been expecting the All Ords & S&P/ASX 200 to get back up to the 4800-5200 range for quite a while. But the lower trend line would indicate that even now the All Ords is above the long term trend and that we shouldn’t expect our stocks portfolio to do much this year.

So in summary view at the moment is that although we are likely to see a major sell-off soon, that by the end of the year we should see the Australian stock market trading around the long term trend and hopefully at the higher end of that range.

Greg Atkinson is the editor of Shareswatch Australia and the Managing Director of Ohori Capital He is originally from Australia but currently resides in Japan. He can be followed on twitter via @GregAtkinson_jp


23 responses so far ↓

  • 1 Stillgotshoeson // Jan 27, 2012 at 11:15 am

    The money printing in the Northern Hemisphere is going to determine what happens and in which order.

    Early QEIII and more bailout funds for the troubled Euro nations will most likely mean an early rally for the asx/all ords and a drop of when the realisation sets in (again) that it is not working and then the retreat.

    We could see further falls which then prompt the fed into action.

    My view is still the same, volatility is to continue.

  • 2 Greg Atkinson // Jan 27, 2012 at 3:16 pm

    The biggest worry I have at the moment is the Baltic Dry Index which appears to be heading for the floor. I keep expecting to see it pull out of its nosedive but alas it still seems to be in a plunge downwards at the moment.

    This makes me wonder if we are going to get hit with some bad numbers out of China soon?

  • 3 Lorenzo // Jan 27, 2012 at 3:56 pm

    The correlation between BHP’s share price and the AMEX Oil and Gas index is very interesting. Wouldn’t a correlation between the two be stupid since that a majority of the BHP’s profits come from other segments besides oil and gas?

  • 4 Greg Atkinson // Jan 27, 2012 at 5:38 pm

    Hi Lorenzo, the correlation exists because generally when the world economy is growing nicely then energy and commodity prices do well hence stocks like BHP are on the rise.

    The major reason the BHP share price recovered quickly after the sell off during the GFC was because of the vast amount of money China threw into construction projects but oil prices remained well below their GFC highs because underlying demand remain subdued.

    So my thinking is that if the BHP share price and AMEX Oil & Gas Index get back into sync then this means the markets might be settling down and trading more on fundamentals again.

    But of course my logic could be very wrong…it wouldn’t be the first time 🙂

  • 5 Leigh // Jan 29, 2012 at 10:34 am

    Greg, I am in agreement that there will be another slump before a steady rise for the ASX All Ords to the end of the year. However, I wonder if I’m wishing it rather than being practical about it because I missed out on a couple of banking stocks I thought were cheap two weeks ago. Like you were looking for TLS under $3.00 perhaps the bargains are slowly being snapped up. I think all the volatility in the market has given us a mind set that says “don’t worry, pick them up on the next down turn,” when it may not happen.

  • 6 Greg Atkinson // Jan 30, 2012 at 7:45 am

    Leigh you are correct that there is a danger that we miss the bargain stocks because we wait for the price to come down and I fear that is what I have done in regards to Telsta.

    My other “skill” is to pick the wrong stock during a market bottom which is what I did when I purchased Babcock & Brown shares during the GFC.

    Perhaps I can redeem myself by making a few wise buying decisions this year!

  • 7 Trading Coach // Jan 30, 2012 at 12:16 pm

    I think the markets is going strong and stronger. I don’t foresee a slump before a rise. I read in another article that we will be witnessing a strong market for the next three years. But who knows anyway?

  • 8 Investment Management Sydney // Jan 30, 2012 at 1:09 pm

    Let’s hope, that the market will be a little more balanced this year. Nobody wants a second 2008-2009 financial desaster experience. Forecast are great, but they are seldom exact. We just have to see, what the future brings and be prepared for it. Always make a realistic worst-case and best-case scenario model.

  • 9 Stillgotshoeson // Jan 30, 2012 at 1:28 pm

    Investment Management Sydney // Jan 30, 2012 at 1:09 pm

    Nobody wants a second 2008-2009 financial desaster experience.

    “Want” No, but be prepared to take advantage of any such disaster.

    Forecast are great, but they are seldom exact.

    The do not have to be exact, if you can at least read the trends right, one should do ok.

    We just have to see, what the future brings and be prepared for it.

    I look at the economic fundamentals as a key component as to where I will utilise my funds. At different stages in my life I will also have different outcomes planned for.

    Always make a realistic worst-case and best-case scenario model.

    100% agree, What will cause decline and what will cause advance and likelihood of these events. Risk exposure also.

  • 10 Ned S // Jan 30, 2012 at 5:31 pm

    “Always make a realistic worst-case and best-case scenario model.”

    Realistic worst-case scenario – The world goes A up.

    Realistic best-case scenario – The world continues to muddle through. (Until it goes A up maybe? :D)

  • 11 Leigh // Feb 1, 2012 at 9:20 am

    We know,many of our ASX blue chips are undervalued, we know they are going to seem very good buys when we look back in five years and we know they are likely to continue to pay good dividends. The only thing holding us back is that we have an over-riding fear that all is still not well and there is another big dipper to ride.
    China has slowed and the Baltic Dry Index looks like a slippery dip but the U.S. is looking comparatively good. At least they make things there and can create their own economy. Australia is sound, although we no longer make much and as they say Europe is likely to muddle through. So dipper or not, now is a good time to buy as long as you are thinking five years and not five minutes and of course as long as you have the cash.

  • 12 Ned S // Feb 1, 2012 at 11:28 am

    The Future Fund is shunning risk at this time Leigh:

    http://www.abc.net.au/news/2012-01-31/future-fund-playing-it-safe/3802814?section=business

  • 13 GoWest // Feb 1, 2012 at 2:32 pm

    Your twitter indicates the BDI is @ 680 – below GFC levels according to the 5 year graphs. What is going on?

  • 14 Leigh // Feb 1, 2012 at 2:52 pm

    Ned S, Future Fund Shunning risk.Yes I noticed that, doesn’t inspire much confidence in their own back yard. Perhaps we are all thinking a little too short term ?

  • 15 Greg Atkinson // Feb 1, 2012 at 3:51 pm

    Go West I believe the BDI got down to just above 660 in late 2008 so we are basically there now. Clearly shipping rates have slumped since December in a big way and that can’t be a good sign. Yes there is some excess capacity out there but shipping companies have also been scrapping older ships and around 6% of the fleet is laid-up (sitting idle) so a lot of capacity has also been taken out of the system. In addition “slow steaming” is now in vogue which also effectively takes capacity out of the system.

    What is going on? Well I would say that global trade volumes are falling and that stock markets are due to take a hit soon. But I am happy to be corrected and am open to hearing other views on the subject.

  • 16 Ned S // Feb 1, 2012 at 4:03 pm

    I think Wang Qishan’s 20 November 2011 comment could be well worth keeping in mind for buy and hold types when one is considering timeframes Leigh:

    “”The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic,” Wang was quoted by the official Xinhua news agency as saying at the weekend.”

    http://www.reuters.com/article/2011/11/20/us-china-economy-global-idUSTRE7AJ06720111120

    The word “chronic” suggests something like 5 or 10 years to me rather than anything much shorter?

    Admittedly though, they are going to throw $1.7 trillion at their economy over the next 5 years:

    http://www.reuters.com/article/2011/11/21/us-china-us-idUSTRE7AK0MT20111121

    We’ll just have to see how much of that benefits Oz.

    But either way, if they are concerned, then yes, I’m concerned.

  • 17 GoWest // Feb 1, 2012 at 5:03 pm

    Thanks greg – I read a note about new ships being much more fuel efficient etc so that could account for it. What I want to know is whether the BDI reflects world trade volume/value.

  • 18 Greg Atkinson // Feb 1, 2012 at 7:13 pm

    Well 90% or more of world trade moves via ships so the BDI and trade volumes are connected I would say.

  • 19 Pat Cox // Feb 2, 2012 at 8:20 pm

    Well the BDI is back to GFC lows, so perhaps this suggests we are closer to the bottom than not. So I take the low BDI as a good sign, provided you have a longer term view!

  • 20 Ned S // Feb 2, 2012 at 10:41 pm

    I thought the BDI was supposed to be a ‘leading’ indicator Pat?

    How long term are you thinking?

  • 21 Pat Cox // Feb 4, 2012 at 11:49 am

    Ned S,

    2-3 years out

  • 22 Greg Atkinson // Feb 7, 2012 at 7:56 am

    Pat 2-3 years seems reasonable. Mind you back in 2008 I was thinking it would be 2-3 years before we would be in another bull market!

  • 23 Plornt // Feb 25, 2012 at 9:22 am

    Thanks for a great post Greg. You usually have accuracy over the long term. Your BDI is currently at 718 http://www.bloomberg.com/quote/BDIY:IND
    Looks like its bottoming out, but I can understand your concerns regarding the magnitude of that fall. I’m not sure whom to believe; the people who say its because of falling demand, or the camp that says its mainly caused by an over supply of ships.
    Maybe a W reversal is comming from a purely technical perspective.

    If we look back at the BDI/SPX correlation over ~20 years we can see that the correlation was not reliable over the early 90s bullmarket and an argument could be made that the BDI is just returning back to its historical long term average, and that the spike seen on the chart from 2002-2007 was due to the extraordinary demand created by excessive debt, and a super bubble which has now deflated (or in the process of being). From ~1994 to ~1998 the BDI was in a lower low downtrend whilst the market was making new highs.
    http://static.seekingalpha.com/uploads/2010/12/28/saupload_untitled2.jpg

    This drivel should not be taken as financial advice. Seek to obtain professional
    advice before proceeding with any financial decision.

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